The 10 key features of world-class franchisors

In many markets across the globe, both domestic and international franchises compete. But what makes the market leader or one particular emerging franchise system so much better than their competitors? Rod Young highlights what sets them apart.

One of the issues that must concern any franchisor or any prospective franchisee is how to ensure that their particular brand has real advantages over its competitors. Over the years, I and my team at DC Strategy have been involved with the development of national and international franchise systems in many different industry groups. Our studies have found that many businesses which stand out for their growth trajectory and market share have common elements. These are not confined to industry groups but are present across businesses as diverse as food, retail and service networks.

The businesses which have built substantial enterprise value for their shareholders, proprietors and franchisees have ten key characteristics. Conversely, almost all franchise networks which fail to thrive lack many of these features.

1. Consistent execution of the fundamentals

At the heart of any business is the customer proposition. While this may seem so basic that you may say that every business has one, the best practice franchisors have a focus on the customer proposition which develops loyalty and keeps them coming back.

There is an understanding that each customer is more than just one transaction and they understand that the “lifetime value” of their customers is many multiples of the first transaction with a new customer. This lifetime value is calculated and benchmarked across the network, which leads to a greater concentration on developing customer relationships that are much deeper and enduring.

The point of sale experience is a key focus to capture new customers and is supported by recognition and acknowledgement that is backed by online and sometimes text communication as well as direct mail to build true customer loyalty to the brand. Included in the fundamentals are a staff/store/uniform/vehicle presentation that creates and reinforces good impressions and a commitment to keeping the customer’s experience fresh.

2. Well defined KPI’S, benchmarking & financial reporting

Alfred P Sloan, the Head of General Motors in the 1950s, said, “the purpose of an enterprise is to make a profit.” We are always fascinated to hear the excuses used as to why a franchise organisation does not require, collect and analyse the monthly profit and loss statements of all franchised outlets. How can any senior executive build, run and maximise the performance of an enterprise if he or she does not have access to the key metrics and especially the net profit of the franchised outlets?

Franchise systems that flourish have highly developed point-of-sale systems linked to management reporting processes that measure and benchmark KPI’s across the network. The better franchisors publish the entire network’s store-by-store profit and loss and educate their franchisees on how to analyse this data and their performance relative to others in the group.

3. Comprehensive compliance management

A complaint of many better franchisees in some networks is that the franchisor is soft on compliance and is letting other franchisees operate to a poor standard. This reflects badly on the franchise and ultimately the value of all franchisees’ businesses. These better franchisees soon sell-up and migrate to networks with more professional compliance standards.

The great franchise systems understand that the customer promise conveyed by advertising and marketing must be faithfully reflected at the customer’s end of the business. They define what the standard of the network is during the recruitment, screening and selection of franchisees with a view to weeding out people who do not value these standards.

Induction and training programmes highlight what the standards are and how they are measured, managed and achieved. The field staff provides a fresh set of eyes to prevent “store blindness”.

Compliance in reporting is also well ingrained in the culture of great franchise systems and is supported by the technology and systems to measure compliance to defined standards.

4. Field staff as coaches, not auditors

The best franchise systems are focussed on developing their franchisees to become better business people by education rather than policing. We all know that every light globe should be working but if field staff spend too much time on such trivia, or develop a culture of blame, they miss the opportunity to earn the confidence of a franchisee. This confidence is critical before coaching commences.

Quality field staff develop far better franchisees and businesses when they have invested the time to listen and understand the goals and motivation of a franchisee and his or her family.

5. A focus on the value of intellectual property

Real champions are brand champions. They understand that the brand is one of the few ways to add a premium price to an otherwise commoditised product or service. We see that the best franchisors don’t just focus on the trade mark and colour scheme which is the cornerstone of the brand, but understand their intellectual property (IP) also embraces their systems, processes and documentation.

In a world where any tangible item can be easily copied, the true value of IP is often enshrined in the way things are done in the organisation. In the leading franchise systems, a respect for these processes and an understanding of how they create value for the business has become part of the culture and is trained into new recruits. Intellectual Capital, which is the collective knowledge in the heads and hearts of the franchisor’s network of staff and franchisees, also falls under the IP category. 

6. Real marketing and advertising muscle

Nothing builds a business like a commitment to advertising. We use the word commitment advisedly because a feature of all leading franchise systems is a focus on advertising and marketing from the very beginning of the network.

While many competitors decide to wait until they are bigger before spending big on advertising and as a result fail to grow, the best franchisors typically allocated a more substantial percentage of turnover to advertising than their competitors in the early days when network numbers were small and then supplemented these relatively small amounts with an additional investment in advertising.

Another feature we see is highly-developed local area marketing activities by franchisees. This doesn’t just happen. The market leaders understand that marketing can drive community engagement and look for, train and expect franchisees to go beyond the store front or vehicle into their local community. The advertising and marketing is multi-faceted with traditional leaflet and direct mail, local newspapers, radio, TV, billboards, PR and a growing online commitment to internet advertising (see page 41 - article by Troy Hazard).

Innovative cross-promotional activities with non-competing business serving the same consumer pool are also created. These innovations are almost always developed first by the better emerging franchisors who are looking for cost effective ways to create a larger-than-life image.

7. Continual innovation

Innovation is where the best franchises keep ahead of the pack. They realise that competitors will eventually copy the market leaders and understand that differentiation is important. This differentiation is not just in product but in every aspect of the business, and consequently the best players have an ongoing innovation programme in almost every area.

It may be seen by the customers and competitors in new products, services or advertising, but the invisible innovation that defends and extends market share is often related to staff training, direct customer communication via email or direct mail and new technology to track the nature of the business and customer trends. This leads to more correct decisions being made earlier that edge better franchisors even further ahead of competitors and re-engage customers who may become jaded without change.

8. Supply chain management

When franchisors start to treat their suppliers as strategic partners they start to approach best practice not only in franchising but in business generally. By harnessing the know-how and experience of their suppliers, good franchisors find a willing partner in new product research and development because suppliers understand that assisting customers to grow will result in increasing sales volumes for those suppliers.

There are also substantial benefits created or costs saved by working with suppliers who understand the strategic plans of their franchisor customers. Many of the better franchisors are deriving substantial income by actively managing the supply chain relationships for the benefit of their franchisees as well as for themselves. The key to supply chain management is firstly ensuring that standards are specified for quality, service and delivery and are not compromised; and secondly, the prices paid by franchisees across the full range of approved products result in a higher gross profit than if that franchisee purchased independently.

Many good franchisors have a strong representation of franchisees in supply chain issues with some international brands having the franchisee body control the buying process, with the benefits being shared between franchisor and franchisee and/or applied to the advertising fund to boost brand exposure. 

9. Sound two-way communication

Many franchisors do not appreciate that franchising is a human resource strategy more than a capital-raising strategy. As networks grow, so does the experience of the franchisee body. The very best franchise systems appreciate that ignoring or isolating the franchisees leads not only to a stifling of innovation but the loss of quality franchisees to other more open networks.

The franchisor/franchisee relationship is the cornerstone of a successful franchise network and the higher the degree of franchisee satisfaction the better the execution of growth strategies. Growth often entails change. Strong communication between franchisee and franchisor (including consultation to gain both ideas and support for change) build the trust needed to make difficult change-management programmes successful across the network.

The communication process starts with an open mind by the franchisor and especially the field support team, and a willingness to listen and respond to franchisee concerns. The process of monitoring and responding to these concerns is where great franchise networks excel. Franchise Advisory Councils, franchisee product development input, regional advertising committees and annual conferences are all hallmarks of the better franchisors. 

10. Induction and ongoing training

When a franchisee applies for a franchise it is obvious that he or she is doing so because they do not have the expertise to operate a business similar to that of the franchisor. If the recruitment screening and selection process is professionally developed and executed, the franchisee will understand the standards expected by the franchisor and the process by which the franchisee will be trained in every aspect of the franchisor’s business.

Good franchisors understand that the initial induction and training prior to a franchisee taking over his or her business is merely an orientation process. The real training starts once the first few months of trading are under the franchisee’s belt and the franchisee starts to settle into a rhythm which will allow them to absorb the subtleties of what makes the franchise really tick.

For the best franchise systems, training is an ongoing activity which is directed not just at the franchisee but his or her staff to ensure that the customer service strategies and the customer experience are being faithfully applied. Training programmes at each level of the business are evident, from the most junior new recruit who may be trained by the franchisee via “train the trainer” programmes to franchisee and manager training supported by suppliers as well as the franchisor. Training takes place both off-site and in conjunction with regular field support coaching and guidance at the franchisee’s location.

Online learning is also emerging as a feature of more progressive and committed franchisors as the “best of the best” understand that training is a commitment that pays dividends by building franchisee and staff satisfaction, sales and profits. The costs for this training are therefore incorporated into the annual budgeting and planning process. 

Summary

In summary, the reader can see that the very best franchise networks are also the very best businesses. They are constantly monitoring the outcomes that result from the ongoing application of the 10 key features of best practice franchisors.

For any franchise to develop into a national and international brand, how well these features are developed and executed will determine an organisation’s position in the competitive pack. The value prize is market leadership and the rewards it brings for all stakeholders in the business, be they customers, staff, franchisees or shareholders.

Rod Young

Rod Young is Executive Director at DC Strategy.

DC Strategy is the region’s leading specialist consulting and legal firm. Our specialist teams in Strategy, Franchising, International and Legal have developed the networks and brands of many of the region’s most successful businesses. Contact Rod Young at rod.young@dcstrategy.com